Housing markets sometimes go down. Houses sometimes fall into disrepair. Either could cause your house to be worth less than you owe for it. When that happens, you’re “underwater”. Being underwater isn’t much fun, but it really sucks when you’re trying to sell.

Unless you’re selling “subject to” (covered in a future post), when you sell you will need to pay off your existing home loan/s/ completely. But when you’re underwater, your sale price won’t cover your loan/s/. What do you do?

You have two options:

Pay the difference yourself. If you owe $100,000 and sell for $90,000, just reach into your pocketbook and hand the bank that remaining $10,000. Sucks, right? Or….

You do a short sale. That’s when you ask the bank to settle for however much the house sells for and forget the rest. Short sales also suck.

Why do they suck? Let us count the ways….

Lots of paperwork.

You need the bank’s approval. They often say “no”.

If they say “yes” you’ll need to find a buyer.

Your credit score will suffer, sometimes as much as with foreclosure.

The bank’s loss will be treated as your personal income by the IRS, possibly increasing next year’s income taxes.

So what’s good about a short sale?

They might hurt your credit score less than foreclosure.

You could qualify for new loans much faster than with a foreclosure.

Your bank’s loss could be smaller with a short sale than at auction, reducing next year’s taxes.

Just applying for a short sale will usually stop foreclosure for a couple months.

If the bank approves, it will stop foreclosure for however long your house is on the market. If you close a short sale, it will stop foreclosure permanently.

Bottom line, short sales suck—but foreclosure sucks more. If your only options are short sale or foreclosure, call your bank and apply for a short sale. But call me first—banks are more likely to approve an application accompanied by an offer, and I’ll give you one.

Pro Tip: Don’t delay. Banks don’t have to even consider your short sale application if it gets too close to the foreclosure auction date.